The Dollar's Decline Halts Amid Trump's Reciprocal Tariff Announcement

The US dollar experienced a recovery from its losses after President Donald Trump declared the implementation of reciprocal tariffs today. This announcement dampened risk appetite and heightened concerns over inflation acceleration.

Key Takeaways:

* The trade-weighted dollar index shed 0.1%, mitigating an earlier 0.3% drop.
* Safe-haven currencies like the Swiss franc and yen benefited from increased demand following Trump's statement on Truth Social.
* Options sentiment toward the dollar reached its lowest level in over a month, indicating bets on a potential end to the Ukraine conflict.
* The euro and Eastern European currencies rallied against the dollar initially, driven by gains in European stocks.

Negotiations and Economic Implications:

* President Trump and Russian counterpart Vladimir Putin agreed to initiate negotiations for a ceasefire in Ukraine.
* US Treasury Secretary Scott Bessent presented an economic partnership agreement to Ukrainian President Volodymyr Zelenskyy during his visit to Kyiv.
* Senior foreign exchange strategist Rodrigo Catril of National Australia Bank attributed the positive market sentiment to hopes of a Russia-Ukraine truce.
* The euro rallied as high as $1.0440 before stabilizing around $1.0400, continuing its three-day winning streak.
* Options market sentiment shifted from negative to neutral, with traders betting on further euro gains.

Euro Outlook:

* The euro-dollar pair has faced pressure due to the European Central Bank's interest rate cuts in contrast to the Federal Reserve's pause.
* Morgan Stanley strategists suggest that a partial convergence in 10-year bond yields could propel the euro toward $1.08.

Market Impact:

* Alvin Tan, head of Asia FX strategy at RBC Capital Markets, attributed the dollar's move to euro buying and stop-triggered selling in other long US dollar positions.
* A risk-on element also contributed to the market action.